Financial markets were on pins and needles as ‘Liberation Day’ approached on Wednesday, after a volatile few weeks of uncertainty surrounding tariff policy. Despite news of a 10% global tariff rate being broadly applied, and a smorgasbord of individual country- and product-specific rates, we only have some improved clarity on trade conditions compared to a few weeks ago. (The full announcement from the White House is available
here.)
Some pessimists were surprised by the high overall tariff percentage rates, which included a 10% blanket global base level, as well as higher specific rates of 54% on China, 20% on the EU, 24% on Japan, and 26% on India, all set to begin in the coming week. The overall net tariff rate has risen dramatically, at least in its initial form. Excluded were some specific items already hashed out, like steel, and Mexico and Canada, based on the earlier announcements and likely re-negotiation of the USMCA (formerly NAFTA) trade agreement later this year. In total, about one-third of imports were deemed exempt, which tempers the bad news a bit. On the other hand, several countries announced retaliatory measures, which could solicit their own further U.S. response. Per the administration’s prior actions, some optimists might point to yesterday’s announcement as being a likely ‘starting point’ for negotiations, which will likely reduce the overall tariff rate as separate deals are made (quickly or slowly). Global trade agreements include thousands of individual products, including different rates and exceptions, so the process involves a lot more complexity than is often assumed.
From the President’s own words, aside from a desire to follow the “golden rule on trade” of “treat us like we treat you,” the objective was to raise around $600 bil. in revenue, which is just over 2% of U.S. GDP. While tariffs pale in comparison to revenue raised through income taxes, it appears to be intended as provide a runway for tax cuts this year, in terms of replacing at least some of the lost revenue. This assumes, of course, that economic growth plugs along at its current pace, as a slowdown in activity would reduce tax revenue from both trade and income. Tariffs can reduce buying power on a macro level, and yes, the irony is that taxes are ramping up on the front end to be coupled with possible reductions this year on the back end. A story for another time is that these revenue amounts are quite small in relation to the Federal budget deficit and certainly to the overall level of U.S. government debt. For the latter, with over 70% of the budget dedicated to mandatory expenditures (the bulk of which being tied to Social Security, Medicare, Medicaid, and related benefits), other ‘tweaks’ will have to be eventually looked at, as closing the deficit and/or reducing the debt load through smaller policies is unlikely to make a sizable dent.